9 Psychological Traits that Affect Our Investing and Business Decisions

Modern portfolio theory assumes that we are rational investors and invest only in efficient and optimal portfolios that provide the maximum return for minimum risk.  The truth (as posited by Behavioural Economists)  is that we far from rational and are subject to a myriad of psychological influences and behaviours that prevent us from not only making optimal investment or business decisions, but can in some cases turn us into morons.  We buy and hold too long or buy and sell too quickly; we refuse to accept losses assuming that we will recover our money or we sell losing investments way too soon; we are overconfident about our own abilities or place too much trust in “experts”; we maintain the status quo and do nothing or we change things too frequently.  The dichotomies of investing behaviour are numerous and fascinating and have lead to creation of field of study referred to as Behavioural Ecomomics.  Each of these behaviours also has a tremendous impact on our business decisions and are discussed below:

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5 Income Tax Tips from the Trenches

It is the time of year when many accountants and tax preparers live, breathe, eat and sleep taxes (leaving very little time to write about them!).  And while much of it is routine, there are numerous issues that arise, the treatment for which is not immediately apparent and can actually be quite interesting (perhaps more so to a tax nerd), some of which are compiled below:

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Invest in RRSPs or Repay your Mortgage?

One of the most common questions asked by Canadian taxpayers is whether they should use their excess disposable income to invest in RRSPs or pay down their mortgage.  Since contributions to an RRSP are made on a tax free basis,  reduction in taxes payable can be substantial.  Conversely,  higher mortgage payments can result in significantly lower interest expense.  As such, there several factors to consider when deciding which option is better:
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Consider These Financial and Tax Implications When Buying a Home

The Canadian real estate market has been a good place to invest in recent years, although comparisons to the US real estate bubble, which finally culminated in 2008, are continuing to intensify. Potential homeowners often find themselves seduced by their vision of the perfect home in the perfect neighbourhood and end up in a difficult situation, referred to as “house poor”, where the majority of their disposable income goes to paying down their mortgages.  This can be avoided by ensuring that you realistically assess what you can afford and being financially responsible. 

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What Happens When You Contribute Excess Amounts to your RRSP

Being able to contribute to an RRSP is one of the great tax saving strategies available to all Individual Canadian Taxpayers who generate “earned income” which is essentially income earned from employment (salaries) or self employment,  (Passive income like dividends and interest is ineligible for consideration when calculating how much you can contribute to an RRSP).  There are .unfortunately limits to how much you can contribute and Revenue Canada (CRA) actually imposes penalties on overcontributions to your RRSP.
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Tax Advice for Last Minute Filers and Procrastinators

If you have filed your tax return, you are entitled to thumb your nose at those of us who are still trying to get it together.  Given that the deadline to file your tax return is imminent, you should probably drop what you are doing right now and make it happen.  For the majority of taxpayers, the stress of having to file your taxes far outweighs the actual complexity of completing the tax return itself, particularly when software is available for even the most “numbers challenged” individuals.  And for those who really don’t want to do it themselves, there are tax preparation offices everywhere that are just a google search away. 
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Tax Return Checklist for Individuals and Unincorporated Business Owners

The deadline to file our tax returns is quickly approaching, resulting in slight feelings of panic for some individuals and small business owners.  As someone who provides tax services for a living, I have found that (like with many things) the stress is far more manageable when you know exactly what you have to do (rather than a vague idea that documents need to be located and forms need to be filled in).  One of the best ways to mitigate this stress is to prepare a checklist.  If you are looking for a comprehensive tax checklist , David at The Tax Issue has prepared an excellent one and I recommend that you check it out.

The checklist below has some of the more common income, deductions and credits that the majority of taxpayers are likely to have:

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Tax Tips: Medical Expenses Tax Credit

Canadian taxpayers are allowed to claim their medical expenses as a deduction subject to certain restrictions and limits.  Luckily your root canal and eyeglasses are deductible, but unfortunately your nose job is no longer eligible to be included in your medical expenses (cosmetic surgery was made ineligible as of March 5, 2010) nor is a hot tub that you install in your home, even if prescribed by your doctor.   Eligible medical expenses also have to reach a specific threshold before they can actually start reducing your taxes payable.  Details, pertaining to the medical tax credit, to keep in mind prior to deducting medical expenses are discussed below:
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9 Tax Facts about Charitable Donations for Individuals and Small Business Owners

Every good act is charity. A man's true wealth hereafter is the good that he does in this world to his fellows. - Moliere

Unfortunately, the Canada Revenue Agency (CRA) has specific criteria for what qualifies as a charitable donation and not all good acts qualify for a tax benefit. Growing a moustache (although not without its costs) or supporting your charity case brother-in-law, are generally not considered to be a charitable donations according to the tax code. Luckily there are a multitude of charitable organizations that do qualify the donors to receive a tax credit for their donations.  Some details about the tax credit are discussed below:

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Understanding Payroll Deductions: Personal Income Tax Rates, CPP/QPP, EI and Basic Exemption

The automation of the tax preparation and filing process has been a boon to individuals and tax preparers alike.   Gone are the days of struggling to find the right box on the return, adding everything up 5 times and still getting different results, and hoping that the CRA can read your chicken scrawl.  Present day tax software not only guides you through every step of the process, it also helps to optimize your allocations thereby reducing your taxes payable.  There is however at least one downside to automation: Since we are more removed from the actual calculations, our understanding of our tax situation is somewhat diminished.  We have an idea of what we expect to pay, which we can see every week on our paycheques (or for self employed individuals, the breathtaking moment when we see the final result on our tax return), but often we are not really sure how these amounts are derived.  Below is a discussion of the  tax rates, deductions and maximums to improve our comprehension of this somewhat complex topic:

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RRSP Facts and Figures: Infographic

One of the most significant tax breaks available to Canadian taxpayers are contributions to retirement savings plans.  As the contribution deadline approaches for 2010, I have compiled some facts and data into an infographic to provide some insight on how they work, and how we measure up to other Canadians:  
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Quebec's Gift Card Legislation and the Solidarity Tax Credit

Some interesting (somewhat) new legislation from Quebec's Consumer Protection Act regarding gift cards eliminating expiry dates and requiring refunds of amounts under $5.  And a new (but) old tax credit from Revenue Quebec, requiring eligible taxpayers to sign up for direct deposit.
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14 Year End Organization, Financial and Tax Tips to Manage Your Personal Finances

As a chronic procrastinator I tend put all my non “attend to immediately” documents in baskets and boxes resulting in, at year end, a colourful array of documents.  There are letters, bills, invoices, receipts, statements and the occasional delivery menu that did not get filtered out.  The intention is to organize them, on a regular basis, in the near future.  In reality, this usually does not tend to happen until the end of the year.

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Tax Planning for Business Professionals: Dividends or RRSPs?

This article in the globe and mail discusses a novel tax strategy.  If you are an incorporated business professional - a lawyer, accountant or consultant -  it might be more benefical from a tax perspective to retain excess funds that would normally be transferred to an RRSP, in the corporation. The business owner would withdraw funds in the form dividends instead of a salary.  (It is necessary to have earned income eg. a salary to build RRSP contribution room.  Dividends are not considered to be earned income.) This strategy results in the following tax savings:
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Noteworthy - Sept 19.2010: All About Tax

CRA Targets Tax Shelters:

The CRA is auditing "gifting tax shelters" ,which mainly target middle income earners.  It seems that the tax shelters have been falsifying charitable donation amounts eg. a donation of $30 will turn into a donation receipt of $100 resulting in a tax credit up to $45.   It is estimated that 170,000 taxpayers will be assessed for about $2.5 Billion.

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Noteworthy - Sept 12, 2010: Rule of 20 for Retirement Savings, Tips for Saving on Hotel Rooms, Will Drafting Software Reviewed

  • How much do you need to retire? The Rule of 20.

This article at Canadian Finance reveals how for every dollar of desired retirement income you need to have $20 of savings in your retirement account.  Desired retirement income calculations should deduct estimated government pension income (assuming that we still have a pension fund) and apply a factor of 20.

  • How To Save Money on Hotel Rooms

Boomer and Echo discuss 5 ways to save money when getting a hotel room, including calling the hotel directly after identifying discounts with online travel sites like Expedia.  Since hotels have to pay a fairly high fee to these sites, they are often happy to extend a discount directly to the customer as it ends up costing  them less.

The NYT looks at 4 software options for writing a will and concludes that it is still useful to have a lawyer at least review it.  Any will drafting software has inherent limitations and does not provide for situation specific advice and guidance. 


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What is your Net Worth?

There comes a point in many people's lives when they want to find out what they are worth.  This is much more difficult to quantify on a metaphysical level; however on a tangible level most people can figure out how much wealth they have created over time.  The definition of net worth is, very simply, the total of all your assets (what you own) less your liabilities (what you owe).
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Noteworthy - Sept 3, 2010: Richest People of ALL Time,Dogs in the Workplace, Accountant Scalps US Open Tickets,

Includes some of the usual suspects - Warrent Buffett, Sam Walton, Rockefeller, Carnegie.  The list also includes the founder of the first department store , a gold speculator and regent to Richard II. 

Researchers at Central Michigan University found that the presence of dogs in the workplace were likely to lead to colleagues being perceived more positively on measures of trust, intimacy etc.  Also, their presence, made employees less likely to snitch. (The answer to world peace? Dogs!)

  • Accountant arrested for scalping US Open tickets

Martin Scheffer, a long island accountant 339 tickets for the US Open in his possession when he was arrested. Perhaps this was not his first time:

"A search of Schaffer's BMW turned up 20 United States Tennis Association parking permits, as well as 28 permits for New York Jets games."



Noteworthy: August27, 2010 - Email Signature, Best Investment Advice, Client Referral Incentives and Questions for Small Business

Do: company, website and business twitter account

Dont: personal details, random quote

To increase your net worth - pay off debt that carries an interest rate greater than 5%, don't be afraid to not invest in times of uncertainty and take advantage of cash discounts.

Discounts, gift certificates and a simple thank you are examples of incentives to get existing clients to provide referrals.

For maximum effectiveness of online marketing strategies, owners of small businesses should (among other things) be checking search engine placement for their business, examine their sources of revenue (are you diversified?), and use social  media to their greatest advantage.


Noteworthy: August20, 2010 - Mark Hurd "resignation", Startup Considerations and Traits of Happy Entrepreneurs

  • Quebeckers not overly interested in wealth creation:

Using 20 indicators, it (Quebec Employers Council) gave Quebec good marks for university graduation, taxation on business investment and spending on research and development. That was offset by the need to do more on the economic integration of immigrants, payroll taxes, labour laws and public debt, the council said in its first report card.

  • The real reason Mark Hurd was forced to resign:

Apparently Mark Hurd's "resignation" had less to do with a violation of HP's sexual harassment policy and more to do with Board's fear of bad publicity.  Although improprieties in his expense reports would have given them cause to fire him, they let him resign (along with his $40 million severance) to avoid a possibility of a wrongful termination lawsuit.

  • 10 Things to Consider before Starting your Start-Up

The article contemplates factors to consider including before launching a startup including competition, industry, funding and marketing.

Thriving on risk, patience and being competent at different jobs are all characteristics of an entrepreneur.